Aug 17, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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📺 Tonight at 11:15 pm ET/PT on “Axios on HBO,” we interview acting Secretary of Homeland Security Chad Wolf about how federal officers handled the Portland protests and his concerns about a Biden-Harris White House (clip), and much more.

🎙 "Ahhhhh, this stuff is really fresh." - See who said it and why it matters at the bottom.

1 big thing: The Fed is back in focus

Photo illustration: Aïda Amer/Axios. Photo: Samuel Corum/Getty Images

Even though the Fed's policymaking committee has no meeting scheduled until mid-September, more attention is turning to the central bank as inflation has begun to pick up and Congress left town without delivering a new round of fiscal stimulus.

Why it matters: Since its unprecedented intervention into financial markets in March, the Fed has been seen as the driver of financial markets — holding up stock and bond prices through its massive bond-buying programs.

What's happening: Treasury yields spiked 26 basis points between Aug. 4 and Aug. 13, hitting their highest since June 24, and the stock market's gains have slowed.

  • "What we’re seeing is the market trying to figure out what’s next from the Fed," Gennadiy Goldberg, U.S. rates strategist at TD Securities, tells Axios.
  • "There’s very little doubt about the Fed being accommodative but what does the fall look like?"

The biggest questions are about the pace of an economic recovery in the U.S. and how that could impact asset prices.

  • While few investors believe a COVID-19 vaccine could be ready and widely available before year-end, investors are positioning just in case — not wanting to miss out on another market bonanza.
  • "People don’t want to wait for vaccine news to come out to reposition their portfolio," Richard Steinberg, chief market strategist at The Colony Group, tells Axios.

The big picture: A quickly recovering economy could be great for stock prices but trouble for bonds, and has the potential to put the Fed behind the curve on inflation, auguring for faster interest rate hikes.

  • Both consumer and wholesale prices have increased much faster than expected in recent months and the Washington Post wrote earlier this month that "the cost of groceries has been rising at the fastest pace in decades."

The bottom line: The Fed faces a number of new pressures but the market will be looking for assurances that chair Jerome Powell and company are still prepared to do whatever it takes to keep interest rates down and asset prices flying high.

What's next: Investors will be carefully perusing minutes from the Fed's July meeting, which will be released on Wednesday.

Bonus chart: Consumer sentiment not jumping with stock prices
Data: University of Michigan; Chart: Axios Visuals

While Wall Street has gotten more excited about the economy since March, U.S. household sentiment remains "depressed," says Jon Hill, rates strategist at BMO Capital Markets.

  • The University of Michigan's consumer sentiment index is still near its lowest since 2013.

What they're saying: "There's no evidence of a V-shaped spike in animal spirits commensurate with near record-high equity indices," Hill said in a note.

  • "The current assessment ticked down to 82.5 from 82.8, while forward expectations improved to 66.5 from 65.9."
  • "Inflation assumptions one year out were unchanged at 3.0% while the 5- to 10-year forward measure printed at 2.7%."
2. Catch up quick

Top U.S. and Chinese trade officials canceled Saturday's planned review of the phase one trade deal, citing scheduling issues but set no new date for the review. (Reuters)

A new U.S.-China Business Council survey finds that 87% of companies reported no plans to move production out of China with nearly 70% saying they are optimistic about the five-year business outlook in the country. (Caixin)

Germany’s anti-trust authority has launched an investigation into "'whether and how Amazon influences how traders set prices on the market-place,'" Federal Cartel Office president Andreas Mundt told the Frankfurter Allgemeine Zeitung. (Reuters)

House Speaker Nancy Pelosi told Democrats on Sunday evening that the House will be called back from August recess — likely on Saturday — to act to "save the Postal Service." (Axios)

3. NY Fed Q3 GDP estimate edges higher
Data: New York Fed; Chart: Axios Visuals

The New York Fed's latest estimate for third quarter GDP ticked up 0.2% to 14.78% on Friday. The Fed branch's staff said the increase was largely due to news from this week’s data releases including positive surprises from industrial production, capacity utilization and prices data.

  • However, those were partially offset by a negative surprise from retail sales data.

The big picture: The forecast has risen from -12% on June 5 to a high of 16.9% the week of July 20. The largest positives have been the U.S. jobs report for May and June.

4. Junk bonds could see back-to-back record quarterly inflows

High-yield bond funds saw their sixth consecutive week on positive inflows for the week ended Aug. 12, data from Refinitiv Lipper showed, netting $1.5 billion for the week.

By the numbers: The six-week streak followed the fourth worst weekly net outflows on record dating back to 1992, showing sentiment on the riskier bond category has been soundly reversed.

  • High-yield or junk bond funds saw steep outflows in Q1 (-$14.2 billion) as investors reacted to COVID-19, but that was followed by record high quarterly net inflows in Q2 ($41.5 billion).
  • "Its net intake of $14.1 billion for Q3 to date has the potential to be its second-best quarterly result," Refinitiv Lipper senior research analyst Pat Keon said in a note.

Where it stands: "The performance from the high yield funds group has mirrored that of its fund flows activity for the year to date," Keon states.

  • After seeing significant losses and outflows, high-yield bonds have bounced back and are now down just 0.5% for the year.

Yes, but: While lower-rated high-yield bonds tend to be more correlated to stocks than other bond categories, high-yield has trailed the stock market's rebound this year.

  • In comparison to junk bonds' still-negative return for 2020, the S&P 500 has gained 4.4% year to date and the Nasdaq has risen 23%.

The intrigue: Refinitiv's data show most inflows to the category have come from mutual funds ($33.8 billion), while ETFs have contributed $21.8 billion to the total net positive flows.

  • Equity funds have seen negative fund flows so far this year.
5. The latest evidence of middle class erosion

New research from Brookings Institution found a significant erosion of the middle class during the 2000s.

  • The study compared changes in income and class position over two fifteen-year periods (1967 to 1981 and 2002 to 2016) for Americans between the ages of 25 and 44.

What they're saying: "The median income growth experienced by prime-age Americans over a fifteen-year period has been cut by almost two thirds, from 27% to 8%," the report found.

"The proportion experiencing a large income loss has more than tripled, from 4% to 12%.
The upper middle class has expanded significantly, while the 'middle' middle class (MMC) has shrunk from 50% to 36%.
Income growth at the top of the distribution has been almost twice as fast as in the middle (48% at the 95th percentile, compared to 26% at the median).
Upward mobility out of poverty has declined, from 43% to 35%.
Downward mobility from the MMC has doubled, from 5% to 11%.
The proportion of Black Americans in the upper middle class has increased significantly, from just 1% to 14%. But large race gaps remain: 39% of white [people] are in the upper middle class or higher.
More education has become more closely associated with a higher income; 59% of those with a BA+ are in the upper middle class or higher, up from 37%."

The bottom line: "The analyses presented here confirm the broadly accepted picture of rising income inequality and slowing income growth for middle-class Americans."

Dion Rabouin

Thanks for reading!

Quote: "Ahhhhh, this stuff is really fresh."

Why it matters: On Aug. 17, 1995, "Yo! MTV Raps," a pioneering show that was the first to air hip-hop music videos on television and eventually reached an international audience, aired its final episode featuring original host Fab 5 Freddy.

  • Freddy's line, "Ahhhhh, this stuff is really fresh" is considered the most scratched sample in the history of hip-hop music. It was first used as a scratch sample on the 1983 Herbie Hancock single "Rockit."